Chan Caligari Seminar 2008 1

IPSAS: Conceptual and

Institutional IssuesJames L. Chan University of Cagliari2008Chan Caligari Seminar 2008 2Major Issues to be Addressed In what general ways should IPSAS be similar to and different from International Financial Reporting Standards (IFRS)? How should the uniqueness of government be addressed in IPSAS? Who sets, finances and enforces IPSAS? Chan Caligari Seminar 2008 3A Global Revolution in Government Accounting?An IntroductionChan Caligari Seminar 2008 4A Global Revolution in Government Accounting Recognition of importance of government accounting as an integral part of the financial management infrastructure of a government/nation. In response to demand for government financial accountability and transparency as an international norm demanded by donors and lenders. A consequence of spread of democratization and market economy since the late 1980s. Chan Caligari Seminar 2008 5Main Features of the Global Revolution in GA Business-type accrual accounting is proposed to replace cash accounting commonly used by government Whole-of-government (consolidated) financial statements at year-end are proposed to replace detailed budget execution reports These features are evident in International Public Sector Accounting Standards (IPSAS) Chan Caligari Seminar 2008 6International Public Sector Accounting StandardsGeneral IntroductionChan Caligari Seminar 2008 7International Public Finance Reporting Standards and Codes Financial reporting requirements in international treaties, agreements and contracts Government section of the UN and European System of National Accounts (SNA) International Monetary Fund (IMF) Government Finance Statistics (GFS) IMF Fiscal Transparency (FT) Organization for Economic Cooperation and Development (OECD) Budget Transparency Chan Caligari Seminar 2008 8What Is New and Different About IPSAS Professional recommendations (standards) for general-purpose external financial reporting by public sector entities world-wide IPSAS converge with IFRS unless public sector uniqueness requires a departure Set by a group of accounting experts under the auspices of IFAC the global federation of national organizations of professional accountants and auditors IPSAS are endorsed by influential international donors and lenders Government are encouraged but not compelled by international treaty to adopt IPSASChan Caligari Seminar 2008 9Translation IPSAS is not set by government officials in their official capacity. Current and former officials participate in their individual professional capacity IPSAS is international in the sense that persons from several nations participate in the process, but IPSAS is not the result of official (governmental) agreements IPSAS has become de facto global GA standards by virtue of endorsement of powerful institutions Chan Caligari Seminar 2008 10Why the IPSAS Lookthe Way It Does So far, IPSAS is largely modest modification of business accounting and financial reporting standards set by the International [Business] Accounting Standards Board (IASB). Business-like standards are to be followed by standards dealing with unique public sector transactions and activities. The standards are written by accountants for accountants/auditors familiar with business accounting. Chan Caligari Seminar 2008 11Justification for the Strategy It is desirable to have comparability and uniformity in accounting for similar transactions in similar ways. It was an economical and efficient way of producing a set of core GA standards. Accrual-based business accounting standards already deal with many similar GA issues. Why reinvent the wheel? Source: Sutcliffe (2003, p. 31). Chan Caligari Seminar 2008 12International Public Sector Accounting StandardsConcepts and StructureChan Caligari Seminar 2008 13The Principles Behind the Standards Government should issue financial reports to the public at the end of a fiscal year. At the core of a financial report are a set of financial statements, which are based mostly on actual transactions and activities, use the accrual basis and are presented in a consolidated format for the whole government. Accounting methods are chosen to achieve fair presentation in financial reports. Chan Caligari Seminar 2008 14Key Concepts in IPSAS Reporting entity is the whole of government as an economic/financial entity Financial statements describe financial position and financial performance measured by accrual basis, and cash flows Financial statements report mostly the effects of past transactions and activities that are acknowledged (recognized) in the accounts. Chan Caligari Seminar 2008 15Key Concepts in IPSAS General-purpose external financial statements should use accounting standards set by a body independent of the government, and should be examined by independent auditors. The accrual basis is preferable to the cash basis because accrual reflects the long-term financial consequences of past and current transactions and activities. Chan Caligari Seminar 2008 16Classifications of IPSAS Cash-basis and accrual basis: 1 vs. many Convergent with IFRS and specific to the public sector: many vs. few Classified by generality of topics General recognition and measurement: few General financial reporting: some Specific transactions and items: numerous Chan Caligari Seminar 2008 17IPSAS: General Recognition and Measurement Standards Revenue from exchange transactions (No. 9) Revenue from non-exchange transactions (taxes and transfers) (23rd) The effects of changes in foreign current exchange rates (No. 4) Chan Caligari Seminar 2008 18IPSAS: General Reporting Standards Presentation of financial statements (1st) Cash flow statements (2nd) Budget information (24th) Consolidated financial statements and accounting for controlled entities (6th) Disclosure about General Government Sector (22nd) Segment reporting (18th) Interest in joint ventures (8th) Related party disclosures (20th) Chan Caligari Seminar 2008 19IPSAS: General Reporting Standards Financial reporting in hyperinflationary economies (10th) Events after the reporting date (14th) Fundamental errors and changes in accounting policies (3rd) Chan Caligari Seminar 2008 20IPSAS: Specific Transactionsand Financial Statement Elements Financial instruments (15th) Investments in associates (7th) Inventories (12th) Investment property (16th) Property, plant, and equipment (17th) Impairment of non-cash-gen. assets (21st) Impairment of cash-generating assets (26th) Chan Caligari Seminar 2008 21IPSAS: Specific Transactionsand Financial Statement Elements Lease (13th) Provisions, contingent liabilities and contingent assets (19th) Construction contracts (11th) Borrowing costs (5th) Net surplus or deficit for the period (3rd) Employee benefits (25th) Chan Caligari Seminar 2008 22Exposure Drafts of Proposed Standards Service concession arrangements (comments due August 1st, 2008) Social benefits: disclosure of cash transfers to individuals and households (comments due July 15th) Chan Caligari Seminar 2008 23Current Projects (May 2008) Conceptual framework for general purpose financial reports of public sector entities Review of cash-basis IPSAS Financial instruments Fiscal sustainability of government programs and their financing Heritage assets Chan Caligari Seminar 2008 24International Public Sector Accounting StandardsStandards on IssuesSpecific to GovernmentChan Caligari Seminar 2008 25No. 23 Revenues from Taxes and Transfers Transfers refer to fines, donations and debt forgiveness, and resources from other non-exchange transactions ! Assets - ! Liabilities = ! Net Assets recognized as revenue under accrual basis and measured at fair value Taxable event triggers potential resource flows. Definition of asset and liability is critical. Chan Caligari Seminar 2008 26No. 21 Impairment of Non-cash Generating Assets These are fixed assets held not for producing commercial benefits. Depreciation is recognized on fixed assets. Impairment loss is the decline in fair value beyond depreciation expense. The standard requires the recognition of loss due to impairment. Chan Caligari Seminar 2008 27No. 24 on Budget Information in Financial Statements Standard deals only with disclosure and assumes availability of budget information Disclosure includes: Original & final budget (projected revenues and appropriations) Actual amounts on the budgetary basis Explanation of variances Reconciliation of accrual and budgetary bases Chan Caligari Seminar 2008 28No. 22 Disclosure of General Government Sector Consolidated financial statements includes entities controlled by the reporting entity Some of these entities are financial and non-financial public corporations in the General Government Sector (GGS) The standards permits additional disclosures about GGS to clarify relationships Chan Caligari Seminar 2008 29Exposure Draft on Social Benefits Social benefits (such as public pensions) are not liabilities as currently defined, but are important enough to be disclosed outside of financial statements. Further research is conducted on their recognition and measurement, and on the disclosure of the sustainability of government programs and their financing. Chan Caligari Seminar 2008 30Research Project onHeritage Assets Heritage assets as a special kind of fixed assets, such as Su Nuraxi Heritage assets are owned and controlled by the reporting government Problems relate mostly to the availability and meaningfulness of financial measures of cost and economic value Non-financial disclosure is a likely option Chan Caligari Seminar 2008 31Consultation Paper onService Concession Arrangements Service concession arrangements (SCA) enable a private-sector entity (operator) to deliver an asset, normally infrastructure, to government (grantor). A IPSAS would address the governments recognition of underlying assets and revenues, and the disclosure of risks and benefits. Chan Caligari Seminar 2008 32Conceptual IssuesChan Caligari Seminar 2008 33A List of Conceptual Issues The wisdom of setting standards before agreement on a conceptual framework. The wisdom of starting IPSAS by modifying existing international business accounting and financial reporting standards (IFRS) Accrual basis vs. cash basis Aggregated vs. disaggregated reporting Budgetary reporting and comparison in financial reports: yes or no; if yes, where and how Chan Caligari Seminar 2008 34Conceptual FrameworkConceptual Issue 1Chan Caligari Seminar 2008 35A Conceptual Framework Project After Setting Many Standards Objectives of financial reporting Scope of financial reporting Qualitative characteristics of financial info. Characteristics of the reporting entity Definition and recognition of elements of financial statements Measurement Presentation and disclosure Chan Caligari Seminar 2008 36Problems With Accounting Conceptual Frameworks Research on conceptual framework is open-ended and time-consuming, and not of practical value. Conceptual frameworks are found not useful in making accounting policy choices. Conceptual frameworks are still needed to delineate the scope of standards and give general direction to standard setting. The way forward: commitment to an explicit theory, such as one based on accountability to specific stakeholders, so that accounting measures are derived from accountability requirements. Chan Caligari Seminar 2008 37No Coherent StandardsWithout Principles User decision usefulness a problematic conceptual framework. Disillusionment with conceptual frameworks in standard-setting: oversold and under-performed. Current fashion: principles-based standard setting. Question: What are the principles of government accounting? Answer: To be found case by case. Likely consequence: incoherent/inconsistent standards. Chan Caligari Seminar 2008 38Simple Government Accounting Principles: A Sample Prepare and publish budgets, maintain complete financial records, provide full disclosures, and submit to independent audits. Accurately measure the governments financial condition & performance. Measure cash and other financial consequences of transactions and events. Keep track of assets, liabilities, revenues, expenditures/expenses. Issue user-friendly financial reports. Chan Caligari Seminar 2008 39No Principles Without Theory Standards and principles are normative. Theory can be Normative: how the world ought to work. Positive: how the word works. Normative theory: accountability. Positive theory: organizational equilibrium. Chan Caligari Seminar 2008 40Demand for Accountability Leads to More/Better Accounting Global expansion of democracy and market economy fosters the norm of reciprocity. Government incurs political and economic accountability. Accounting information is used to monitor and enforce terms of political and economic exchanges. Chan Caligari Seminar 2008 41Political Exchanges in Constitutional Government Democratic governance requires Separations of powers: legislature, executive and judiciary; Checks and balances. Conflicts exist between the power to withhold information and the right to know. Openness is determined by distribution of power. Transparency reduces information asymmetry and redistributes power. Chan Caligari Seminar 2008 42Who is Accountable to Whom?Principal Political executives Legislature The people Agent Civil servants Executive departments Government Chan Caligari Seminar 2008 43 Models of Accounting and AccountabilityModel X Model YMajor adherents Continental Europe Anglo-America Relationship between budgeting & accounting Accounting subordinated to budgeting Accounting at par with or influential on budgeting Accountability emphasized Administrative and legislature Government to the public Chan Caligari Seminar 2008 44Theory of Government Business accounting is based on an owner-centered theory of the firm (Coase, 1937). Public sector counterpart: voter-centered theory of government. From stockholders to stakeholders. From voters also to stakeholders: an organization theory of government based on equilibrium of interests of stakeholders. Chan Caligari Seminar 2008 45Government and Stakeholders Grant givers (higher-level governments) Donors (bilateral, international organizations) Taxpayers Fee payers Investors in government securities Creditors Borrower, insured, Contractors: vendors of goods and services Employees Chan Caligari Seminar 2008 46All Stakeholders Want to Know Governments benefits to them: amounts, timing, and degree of uncertainty. Government officials balance between Contributions of stakeholders Inducements (benefits) from government. Inspiration from Simon (1945) and Barnard (1938) and need for further research and development. Chan Caligari Seminar 2008 47Emulating Business AccountingConceptual Issue 2Chan Caligari Seminar 2008 48A Critique of the Strategy of Emulating Business Accounting A set of IPSAS without dealing with issues unique to government cannot be called core standards. The PSC incurred not only actual expenditures, but also opportunity cost for six years. The PSC overlooked the valuable experiences of developing GA standards in the United States since the 1970s at least. The PSC ignored the critical differences between the firm and government that affect their accounting and reporting. Chan Caligari Seminar 2008 49Premises of Business Accounting Primacy of owners and creditors Valuation of the firm = value to owners Recognition of private property rights Voluntary market exchanges to determine prices Legal system for enforcing contracts Sufficiency of monetary measurement Chan Caligari Seminar 2008 50In Contrast to Business,the State ... Is sovereign and has power to tax and make laws More symmetrical status of various stakeholders Pursues macro-economic goals sometimes to the detriment of its own short-term financial standing Promotes equity by redistributing income/wealth Unique role in producing public goods Generates hard-to-measure non-financial outputs and outcomes Chan Caligari Seminar 2008 51Governmental AccountingUniqueness of Govt. Public goods Redistributive function Power to tax Regulatory power Acctg. Consequences Cannot individualize prices and match expenses Equity as performance criteria Non-reciprocal transactions Not obligated to accept private-sector rules Chan Caligari Seminar 2008 52Some Characteristics of Government Divided power in constitutional government Nature of public property in terms of origin, value other than economic value, longevity Broad interpretation of government responsibility for general welfare Tax and transfer revenues cannot be recognized on the basis of services rendered Chan Caligari Seminar 2008 53 Not Alls Well WithBusiness Accounting Rational expectations: transactions structured to avoid or take advantage of accounting rules. Accounting rules accruals and reporting entity susceptible to manipulation to boost earnings. Inconclusive debates on values vs. costs. Multiple acceptable methods for depreciation and inventory, with huge impacts on numbers. Ad hoc and strategic earnings forecasts. Chan Caligari Seminar 2008 54Accrual BasisConceptual Issue 3Chan Caligari Seminar 2008 55IPSAS Boards Stance and Dilemma Accrual of revenue and expense is tied to recognition and measurement of assets and liabilities Fundamental commitment to accrual basis is contradicted by cash-basis IPSAS for countries which are the target adopters of IPSAS. No clear alternative to full accrual of revenue based on service effort and accomplishment Cash and accrual are viewed as polar opposites, while accrual is really a matter of degree. Chan Caligari Seminar 2008 56Back to the Basic Financial Accounting Framework Accounting equation (identity): assets - liabilities = net assets Revenues and expenses/expenditures as increases and decreases in NA, respectively Basic requirements for accrual accounting: A beginning balance sheet with a chart of asset and liability accounts A double-entry recording system The ability to interpret financial consequences of transactions and events in terms of effects on financial position Chan Caligari Seminar 2008 57Other Than Full Accrual:Degrees of Accrual Mild accruals: short-term financial assets and short-term liabilities. Moderate accruals: add long-term financial assets and long-term liabilities. Strong accruals: add capital assets and contingent liabilities. Radical accruals: add legislated benefits. Chan Caligari Seminar 2008 58Transition to Accrual Disallow the cash-basis; distinguish between cash flow accounting and cash basis accounting Agree to the balance sheet perspective Adopt the gradual, symmetrical approach Gradual: from mild to moderate to strong Symmetrical: at each degree, recognize assets and liabilities to avoid distortion and manipulation Chan Caligari Seminar 2008 59Level of Aggregation in ReportingConceptual Issue 4Chan Caligari Seminar 2008 60Premise of Consolidated Financial Statements in Corporate Reporting Management control over all resources Majority ownership interest in subsidiary as quantitative criterion of consolidation Users of financial statements prefer economic substance over legal form Investors and creditors need to know about the whole reporting entity Additional disclosures can be made for dissimilar lines of business Chan Caligari Seminar 2008 61Nature of Public Sector Entities The range of government functions depends on political and economic system Government functions can include: state or governmental activities, business-type activities, and fiduciary activities (e.g. pensions) Besides ownership, there are other complex and indirect methods of control and influence Political power is often diffused among levels of government, and among branches of government at the same level Chan Caligari Seminar 2008 62Variations of Consolidated Financial Reporting One column for the reporting entity Reporting entity = Primary government (PG) + legally independent organizations for which the PG is accountable Primary government only in one column PG total = Governmental activities + Business activities Chan Caligari Seminar 2008 63Sources of the Problem One set of general-purpose financial statements for diverse user groups Lack of consensus on external user groups Lack of information about intermediary and end users, and their needs and capabilities. Appropriate level of appropriation cannot be determined without adequate info. about users. Chan Caligari Seminar 2008 64Budget Reporting and ComparisonConceptual Issue 5Chan Caligari Seminar 2008 65Sources of Problem The budget is inherently speculative and financial statements are necessarily tardy Separate institutional structures for setting budgeting and accounting rules Different theoretical foundation, professions and training Different concepts, standards and methods due to differences in purpose Chan Caligari Seminar 2008 66Including Budgets and Financial Statements of Different Years To overcome the inherent limitations of a budget and financial statements: Budget document for year (t+1) could show financial statements for year (t-1) and budget for year t. Financial statements for year (t) could show budget for year (t+1) and possibly (t+2). Chan Caligari Seminar 2008 67Accounting in Relation to BudgetingModel B Model AMajor adherents Traditional Continental Europe Anglo-America Power relationship Accounting subordinated to budgeting Accounting at par with or influential on budgeting AccountabilityAdministrative and legislature Government to the public Chan Caligari Seminar 2008 68Reconciliation as a First Step Toward Integration Use of budgetary basis for actual to budget comparisons Reconciliation is the most that can be expected due to differences in Purpose: control vs. fair presentation Emphasis: flows vs. stocks and flows Time horizon: annual vs. long-term Measurement: cash and obligational vs. accrual Chan Caligari Seminar 2008 69Indications of Accounting Influences on Budgeting Legally and formally accounting is not permitted to regulate budgeting Budgeting cannot avoid dealing current and future financial consequences of past decisions Budgeting can/should use accrual accounting information Perhaps this is accrual budgeting Chan Caligari Seminar 2008 70Contemporary Government Accounting in PerspectiveChan Caligari Seminar 2008 71Priority of Accounting Services for Government? Basic purpose: To safeguard public money by preventing and detecting corruption and graft. Intermediate purpose: To facilitate sound financial management. Advanced purpose: To demonstrate and discharge financial accountability to the public. Chan Caligari Seminar 2008 72Developing Accounting Capacity in Support of Management IPSAS represent the most advanced development First stage: cash management Second stage: managing short-term financial resources and liabilities Third stage: managing long-term financial resources and liabilities Fourth stage: managing operating fixed assets Fifth stage: protection of all fixed assets Chan Caligari Seminar 2008 73Institutional IssuesWho sets standards for whom?Chan Caligari Seminar 2008 74IPSAS: Authoritative and Independent for the first time there is an authoritative set of independent financial reporting standards for government International Federal of Accountants, Public Sector Committee (1987-2004) succeeded by the IPSAS Board since 2004. Chan Caligari Seminar 2008 75Goals of IPSAS Greater government accountability in all countries. Improved quality and reliability in accounting and financial reporting. Better financial & economic performance. Better financial management and discipline. Harmonization of reporting requirements. International harmonization. Source: IFAC Quarterly (1996), p. 2. Chan Caligari Seminar 2008 76Guiding Philosophy and Strategy Commitment to convergence with IFRS unless there is a public sector specific reason for a departure High quality standards for global use in preparing general purpose financial statements Add value to quality and transparency of public sector financial reporting Chan Caligari Seminar 2008 77The Standard Setters IPSAS Board is a part of the International Federation of Accountants (IFAC), composed of 157 national associations of professional accountants in 123 nations IPSAS Board has 15 members nominated by national bodies, and 3 public members IPSAS Board is assisted by a Consultative Group Chan Caligari Seminar 2008 78Funders and Observers Observers who provide(d) financial support: International Monetary Fund World Bank United Nations Development Program Asian Development Bank Observers who do not provide financial support: International Organization of Supreme Audit Institutions Organization for Economic Cooperation and Development International Accounting Standards Board European Commission Chan Caligari Seminar 2008 79Due Process Wide dissemination of research studies and exposure drafts of proposed standards Consideration of comments Open meetings around the world Adoption of standards by at least " of members present (9 members constitute a quorum). Chan Caligari Seminar 2008 80Institutional IssuesChan Caligari Seminar 2008 81The Success and Leadership Role of Business Accountants and Auditors By virtue of expertise, IFAC is understandably closely allied with IASC In most countries and globally, accounting and auditing profession is dominated by members working in the private [not public] sector Business accounting has the longest and most successful professional standard setting globally and in some countries Harmonization of specialties enhances the unity of the accounting profession and discipline Chan Caligari Seminar 2008 82Reverse Regulation? The accounting and auditing profession argues for greater independence, i.e. free from government and political interference Professional licensing and standards rest on a legal foundation Can / Cannot governments regulate its own accounting? Chan Caligari Seminar 2008 83The Roles of Official Representatives of Governments Legislators, who have the authority to write laws on a jurisdictions government accounting and can provide/withhold legal basis and appropriations for IPSAS Finance ministers, who oversee a governments accounting Budget directors, who provide/withhold resources Chief Accounting Office, who implement any changes Government auditors, who use financial data in investigations and attest to financial statements Chan Caligari Seminar 2008 84Distribution of Board Seats Nomination by IFAC institutional members vs. public members Possible bases of distribution of membership Geographical, nationality Stages of national economic development Types of government accounting system Professional experience and expertise Issue: relationship between adoption of standards and representation on IPSAS board Chan Caligari Seminar 2008 85What Does Adoption Mean? Adoption and process of adoption are too vague for the list of adopter nations to be complete and reliable. At issue is the varying interpretation of accrual Is adoption of cash-basis IPSAS equivalent to accrual-basis IPSAS? Not in my view De facto adoption by nations whose GA standards are broadly consistent with IPSAS Adoption should be a formal decision accompanied by an implementation plan with adequate resource commitments Chan Caligari Seminar 2008 86IPSAS and Developing Countries The cash-basis IPSAS, in effect, is an escape clause for many developing countries Personal view: Accrual in principle for all nations, but implementation in stages Step 1: The willing to leave an audit trail Step 2: The ability to analyze transactions and record effects in a double-entry system Gradual advance from mild to moderate degree Chan Caligari Seminar 2008 87ConclusionChan Caligari Seminar 2008 88A Premature Revolution Intellectually: Transferability of business GAAP to govt. Competing models: good, better, and best? Uniform rules for a diverse world. Institutionally: Professional authority over govt. authority. Accounting profession over other professions. IFAC over other international organizations. Chan Caligari Seminar 2008 89Business Accounting Rulesfor Government The business of government is more than government businesses. Inheriting problems along with solutions. Business lead; government - lag. Drips (standards) vs. package (system change-over). Global markets vs. nation-states. Chan Caligari Seminar 2008 90Superiority of Model A? A model resting on soft foundations: Info. costs and users rational ignorance. The sum and the parts: the fallacy of consolidated financial statements. Effect of advance budget disclosure on the info. value of year-end financial reports. Good, better, and best models: the lack of a consensus standard for judging standards. Existence and legitimacy of Model B. Chan Caligari Seminar 2008 91Globalization of Model A Minimum requirements or unreachable stars? Issues: comparability vs. uniformity; principles vs. standards. How much accounting uniformity, given national diversity in: Political and government systems. Economic systems. Culture. Stages of development. Public sector involvement of accounting profession. Chan Caligari Seminar 2008 92Professional and Governmental Authority The virtues of the professional. Should accounting rules of government be set by government or for government? Rules of professional engagement: governments delegation or invitation? Over-reaching initiative? The primacy of GAAP in relation to laws and regulations: audit opinions in capital markets and political markets. Chan Caligari Seminar 2008 93Accounting Standards by Accountants (Alone)? The accountants professional relatives: budgeters, auditors, managers,... Constituencies of accounting standards boards: the incidence of costs and benefits. Participation and due process: a seat at the table who? how many? Chan Caligari Seminar 2008 94IPSAS raises at least as manyquestions as answers!Chan Caligari Seminar 2008 95References and Further Readings Public Money and Management (Jan. 2003) The Global Revolution in Government Accounting by D. Heald. Government Accounting: An Assessment of Theory, Purposes and Standards by J. Chan. Measuring and Reporting the Nations Finances: Statistics and Accounting by R. Jones. The Standards Programme of the IFACs Public Sector Committee by P. Sutcliffe. Chan Caligari Seminar 2008 96Thank you!Please address comments and suggestions tojimchan@uic.edu